Small Business

Rising Health-Care Costs Hurt Small Biz

A survey of some 4,000 self-employed individuals and business owners with 10 or fewer employees finds most can't afford to offer health insurance to employees

A majority of microbusiness owners (those with 10 or fewer employees) agree that it is their responsibility to provide health insurance for their employees, but high costs mean very few offer it, according to the 2008 Health Care Survey conducted by the National Association for the Self Employed.

When it comes to the election-year reforms currently being discussed, entrepreneurs strongly believe that every U.S. citizen should have health coverage, but they are deeply divided about the best way to achieve that goal—and worried about tax increases that might result. Kristie Darien, executive director of the NASE, parsed the survey results recently with Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.

This survey of nearly 4,000 self-employed individuals and business owners with 10 or fewer employees is a follow-up to similar surveys your organization conducted in 2002 and 2005. What are the biggest changes from those earlier studies?

The good news is that more respondents—67%—reported having health insurance for themselves, as compared with 54.9% in 2005. However, there was a shocking drop in the percentage that said they're providing coverage for their full-time employees. In 2005, 46.2% said they were offering employee coverage; in 2008 the number went down to 18.6%. That's one of the most massive drops we saw in terms of all the questions we asked across both surveys, and the sole reason is cost, which was cited by 65% as the top barrier to providing coverage.

How much are small employers and the self-employed spending for health coverage?

Health expenditures ranged from $1,000 to $60,000, with a median cost of $5,520 annually. The median costs for health insurance rose from 3.7% of total revenue in 2005 to 5.5% in 2008. The survey showed that single-person businesses spend a larger percentage of their total sales on insurance than do companies with six or more employees and those making the greatest revenue.

More than three-quarters of respondents said their health insurance costs have increased in the past 12 months, with the average increase at 14.7%. That was slightly lower than the 20.7% who reported their costs had gone up over the 12 months prior to the 2005 survey.

Health-care costs have been one of the top concerns for small business owners for years. What do they think of the U.S. health-care system right now?

A large majority of respondents, 84.8%, said all U.S. citizens should have health coverage, with 79.7% of those saying that covered individuals should have to pay some portion of their costs, whether coverage is provided through private insurance or the government. That's pretty indicative of the entrepreneurial mindset. They're working hard, and they want everyone to have a stake in their health care by paying for it.

When asked what most affects high health-care costs, most entrepreneurs across all demographics and company sizes answered, "Insurance companies making too much profit" (28.8%) or "Doctors/hospitals charging too much for services" (21.7%). Medical malpractice lawsuits was third, with 13.2%. I was surprised that the cost of prescription drugs wasn't higher on the list, along with things like unhealthy lifestyles and the aging U.S. population.

What do the entrepreneurs who answered your survey think about the proposals being circulated in the Presidential campaign?

When asked about preferred health-care options, there was no clear consensus. The leading response was a government-run, universal health-care system, with every American required to purchase some type of coverage. But that had only a narrow margin, with just over 25% choosing it. The second-most popular plan was a universal health-care system paid for by taxes. That got 24.5% of the responses. The third group, with 22.9%, favored keeping the health-care system we have now. So basically, the three options were tied.

The other interesting thing is that a large number of respondents—almost 30%—said they were not sure which proposal was preferable or they chose "none of the above."

That shows a lot of fluidity. Do you think entrepreneurs are willing to be persuaded about new options?

It shows that there's a huge diversity of opinion on this issue of how to reform the system. But we also asked about the tax issue, and there's less willingness there.

We asked whether these entrepreneurs would support increased taxes to pay for a universal health-care system. A significant number—40.3%—said yes, they are willing to pay additional taxes for a tax-funded universal health-care system. An additional 10.8% favor such a system, but are unwilling to see their tax bill increased to fund it. And just over one-third said they do not favor a tax-based universal health-care system at all.

Most who were willing to have their taxes increased favor keeping the increase to 5% or less, but about 40% said they would be willing to pay an average tax increase of 7.3% to fund universal health care.

Is that reflective of the other longtime top concern for entrepreneurs: taxes?

That's the issue, when you're looking at microbusiness owners and all the other burdens that are placed on them. The money they have left over from their company has to go to fund their retirement and to pay taxes. They already have cash-flow issues and many have a hard time getting by, so it's not surprising that there would be some trepidation about that approach.

They also expressed some worries about a government-run health-care system. What were they?

Most are concerned about the potential for reduced quality of care in a government-run system, and paying higher taxes. Lesser concerns included limited choice of doctors, long waiting times for nonemergency procedures, long waiting lists to see specialists, higher premiums, and lack of access to tests, treatments, or medicines. Entrepreneurs are very hands-on with their businesses. They worry that if the government runs health care, they won't be in charge anymore.

The survey presented several actions the government could take on health care. Which ones did they agree and disagree with?

Majorities approved of allowing small businesses to group together via associations or organizations to purchase health insurance, encouraging small business owners to purchase health insurance by providing tax credits, reforming tax law so that whether you buy health insurance individually or get it through an employer you get the same tax benefits, and increasing regulation on health insurance, pharmaceutical companies, and hospitals.

Near majorities approved of expanding government programs to cover uninsured children and low-income individuals unable to pay for coverage, and increasing funding to states for high-risk pools that provide coverage to individuals with chronic or terminal illness.

They disagreed with proposals that would mandate all employers to provide access to health insurance for full-time employees and require all Americans to purchase health insurance. For microbusiness owners—whose average gross revenue was $62,000 in 2007—a mandate that says they have to purchase health-care coverage for their employees is something they're concerned about, particularly if there are no tax credits or other incentives that would help them out.